Thursday, September 27, 2012

President Obama’s new Medicare tax on unearned investment income will be one that will change things for our marketplace. Though most of the American population will be unaffected by his new tax imposition, we feel that our area is one that will indeed feel it.

There is much debate about who will have to pay the additional 3.8% taxes on top of already existing capital gains taxes for properties that fall under specific criteria. But one thing is certain. Many of the properties and sellers in our area come will be impacted. To help explain it further, I’ve put together a couple examples after briefly outlining the guidelines for this new tax.

Tax Applicable to Secondary Homes and Investment Properties

The first thing to keep in mind is that this tax will not apply to homes sold that are primary residences. Since most of the properties in our marketplace fall in the other, secondary category, read the following points carefully to find out if you may be subject to additional capital gains taxes. There are some nuances to the tax law as well that have to do with whether or not the property is used for personal enjoyment, is rented out and how long it is rented out for during the year. These (and other) points are mentioned in this concise list of FAQs about the Medicare tax published by the National Association of Realtors.

Gains Over Specified Amount for Individuals and Couples Apply

If the total amount of capital gain exceeds $250,000 for individual sellers or $500,000 for married couples –then the 3.8% tax applies to the amount exceeding the normal capital gains limits. We deal with properties well over this amount regularly and in some cases these properties were purchased a while back, resulting in present day sales that yield significant capital gains.

Upper Level Incomes Are Impacted by New Real Estate Tax

As is the case with most of our clients in this area, the annual Adjusted Gross Income must be at $200,000 for individuals and $250,000 for married couples filing jointly for the tax to be applicable. When these sellers have a capital gain on their property exceeding the capital gains limits mentioned above, the sale involves secondary or income generating properties and they have incomes starting at $200k/$250k, the tax will be applied. For married couples filing separately the AGI threshold is $125,000.

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It is important to keep in mind that both conditions (income and exceeding capital gains limits on relevant properties) must be applicable in order for the tax to be imposed. Here is another report published by the National Association of Realtors outlining additional scenarios where this real estate tax would be applied.

Scenarios to consider:

Example 1:

A property bought by an individual in 1990 for $200,000 that is now worth $700,000 sells accordingly. The capital gains that go above and beyond $500,000 would be taxed an additional 3.8% as long as the seller has an income of at least $200,000. Since the allowable capital gains before taxation for an individual is $250,000 – in this scenario, the amount additionally taxed would be $250,000. The healthcare tax for this property would be $9,500.

Example 2:

A home that was purchased by a married couple filing jointly with a combined income of $220,000 in 2000 for $350,000 and sold today for $800,000 would yield capital gains amounting to $450,000. Since this is $50,000 under the capital gains limit prior to taxation and they earn less than the required income level for couples, they would not have to pay the additional 3.8% tax on the sale of this property.

If you are considering selling your property and are unsure of whether you will be subjected to these taxes in addition to all the other expenses that go along with selling, contact us today.